Bookkeeping – Debits and Credits with Parenthesis on the Balance Sheet (Lesson 13)

Lesson 13

In the last 12 lessons I introduced debits and credits for the six types of accounts. In addition I explained the financial statement relationship between the balance sheet and the income statement (profit and loss). InLesson 12I addressed contra accounts. In the examples used with contra accounts I illustrated how the contra amount is reported with parenthesis.

Remember contra accounts are essentially an offset to a primary account. Contra information is always reported in parenthesis. Well, other information in the two primary financial statements is also reported using parenthesis. This lesson explains parenthesis in balance sheet accounts. For the bookkeeper the secret to the parenthesis usage is this:

Parenthesis are always used in reports to identify contra account values; AND/OR

Parenthesis are sometimes used to report atypical information related to types of accounts.

I know, many of you are wondering what I mean by “Atypical”. Atypical refers to information in a type of account that is not traditional but is still normal. To elaborate on this I am going to give examples with each of the types of accounts.

Balance Sheet Types of Accounts

Asset Types of Accounts

Current Assets- Those assets that can be turned into cash in a relatively short period of time (less than one year).

Fixed Assets- Assets, usually physical in nature, that will be used over more than one accounting cycle. (more than one year)

Other Assets- Assets that are uncommon and held for use in the future (such as land for future expansion) or intangible in nature. Intangible examples include ownership of copyrights, patents etc. But the most common intangible is refinancing cost.

Most often a reader in this type of accounts sees contra accounts in parenthesis to include:

Allowance for doubtful accounts

Depreciation

Amortization

As I explained inLesson 3and inLesson 4, whenever an asset type of account has a credit balance it is customary to report this information down in liabilities. Well, most basic small business accounting software is unable to this. So when an asset type of account has a credit balance such as an overdrawn bank account, the information is reported with parenthesis around the value.

Liabilities

Very similar to asset type of accounts, liabilities have two major groupings. The first are current liabilities; current meaning due within the accounting cycle (less than one year). The second group are long term liabilities; those amounts owed over extended periods of time (more than one year). The traditional value in liabilities are credit balances. The non-traditional types of information are reported via parenthesis, i.e. debit balances.

Debit balances in credit driven accounts include:

Amounts owed from governmental authorities back to the business for over-payments or tax refunds.

Equity Accounts

With equity accounts, contra accounts are abnormal; however, payments to owners can and are often reported as a contra value to retained earnings. Most bookkeepers actually create primary accounts for draws and distributions for each respective owner. Therefore parenthesis is used to report this. See below:

There is one really interesting note to parenthesis with equity accounts. In a prior lesson I explained that when there is a profit or a loss from the income statement it is automatically reported in the current earnings line. Naturally you want sales, which are credit driven, to exceed costs. If so, then the final balance is a profit which results in a credit balance. This profit is displayed in the equity section without parenthesis. After all, it is a credit value in a credit based type of account (Equity).

What happens when the business incurs a loss? Well let’s walk through this.

Key Business Principle

For a loss to occur on the P and L, costs [debits] must exceed sales [credits]. If so, then the value on the bottom line is a debit which is reported with parenthesis. This debit value line is reported in the “current earnings” line. A debit value in the equity section should have parenthesis around the value. Thus losses have parenthesis in the equity section.

Summary

Parenthesis in balance sheet accounts indicate one of the two different possibilities. First the value may be related to a contra account such as depreciation or amortization. The second relates to reporting atypical information. Atypical means that it is not normal to have this but it can and does happen. The best example is a loss in a business. Losses are not desired but is does happen. This loss is presented with parenthesis as the loss is a debit value in a credit driven type of account. Act on Knowledge.

If you have any comments or questions, e-mail me at dave (insert the usual ‘at’ symbol) businessecon.org. I would love to hear from you. If interested in my help as an accountant or consultant, contact me through the ‘My Services’ page in the footer.

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I spent 12 Years as a Certified Public Accountant,
Over 20 Years of Practice in Accounting and Consulting,
Controller in Management of Closely Held Operations,
Masters of Science in Accounting,
Prepared over 1,000 Business Tax Returns and Hundreds of Individual Returns

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